AIG 2007 Annual Report Download - page 135

American International Group, Inc. and Subsidiaries
Financial Services Operations
AIG’s Financial Services subsidiaries engage in diversified activities including aircraft and equipment leasing, capital markets, consumer
finance and insurance premium finance.
Financial Services Results
Financial Services results were as follows:
Percentage Increase/(Decrease)
(in millions) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005
Revenues:
Aircraft Leasing(a) $ 4,694 $4,082 $ 3,668 15% 11%
Capital Markets(b) (9,979) (186) 3,260 — —
Consumer Finance(c) 3,655 3,587 3,563 2 1
Other, including intercompany adjustments 321 294 186 9 58
Total $ (1,309) $7,777 $10,677 —% (27)%
Operating income (loss):
Aircraft Leasing(a) $ 873 $ 578 $ 769 51% (25)%
Capital Markets(b) (10,557) (873) 2,661 — —
Consumer Finance(c) 171 668 922 (74) (28)
Other, including intercompany adjustments (2) 10 72 — (86)
Total $ (9,515) $ 383 $ 4,424 —% (91)%
(a) Both revenues and operating income include gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133,
including the related foreign exchange gains and losses. In 2007, 2006 and 2005, the effect was $(37) million, $(73) million and $93 million,
respectively. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of borrowings. In the
second quarter of 2007, ILFC began applying hedge accounting to most of its derivatives hedging interest rate and foreign exchange risks associated
with its floating rate and foreign currency denominated borrowings.
(b) Revenues, shown net of interest expense of $4.6 billion, $3.2 billion and $3.0 billion in 2007, 2006 and 2005, respectively, were primarily from
hedged financial positions entered into in connection with counterparty transactions. Both revenues and operating income include gains (losses) from
hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. In 2007,
2006 and 2005, the effect was $211 million, $(1.8) billion and $2.0 billion, respectively. The year ended December 31, 2007 includes a $380 million
out of period charge to reverse net gains recognized on transfers of available for sale securities among legal entities consolidated within AIGFP. The
year ended December 31, 2006 includes an out of period charge of $223 million related to the remediation of the material weakness in internal
control over the accounting for certain derivative transactions under FAS 133. In the first quarter of 2007, AIGFP began applying hedge accounting for
certain of its interest rate swaps and foreign currency for ward contracts hedging its investments and borrowings. In 2007, both revenues and operating
income (loss) include an unrealized market valuation loss of $11.5 billion on AIGFP’s super senior credit default swap portfolio and an other-than-
temporary impairment charge of $643 million on AIGFP’s available for sale investment securities recorded in other income.
(c) Both revenues and operating income include gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133,
including the related foreign exchange gains and losses. In 2007, 2006 and 2005, the effect was $(20) million, $(94) million and $75 million,
respectively. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of borrowings. In the
second quarter of 2007, AGF began applying hedge accounting to most of its derivatives hedging interest rate and foreign exchange risks associated
with its floating rate and foreign currency denominated borrowings. In 2007, includes a pre-tax charge of $178 million in connection with domestic
consumer finance’s mortgage banking activities.
2007 and 2006 Comparison In 2007, AIGFP began applying hedge accounting under
FAS 133 to certain of its interest rate swaps and foreign currency
Financial Services reported an operating loss in 2007 compared forward contracts that hedge its investments and borrowings and
to operating income in 2006 primarily due to an unrealized market AGF and ILFC began applying hedge accounting to most of their
valuation loss of $11.5 billion on AIGFP’s super senior credit derivatives that hedge floating rate and foreign currency denomi-
default swap portfolio, an other-than-temporary impairment charge nated borrowings. Prior to 2007, hedge accounting was not
on AIGFP’s available for sale investment securities recorded in applied to any of AIG’s derivatives and related assets and
other income, and a decline in operating income for AGF. AGF’s liabilities. Accordingly, revenues and operating income were
operating income declined in 2007 compared to 2006, due to exposed to volatility resulting from differences in the timing of
reduced residential mortgage origination volumes, lower revenues revenue recognition between the derivatives and the hedged
from its mortgage banking activities and increases in the assets and liabilities.
provision for finance receivable losses. In 2007, AGF’s mortgage The year ended December 31, 2007 included an out of period
banking operations also recorded a pre-tax charge of $178 mil- charge of $380 million to reverse net gains recognized on
lion, representing the estimated cost of implementing the Supervi- transfers of available for sale securities among legal entities
sory Agreement entered into with the OTS. consolidated within AIGFP. The year ended December 31, 2006
ILFC generated strong operating income growth in 2007 included out of period charges of $223 million related to the
compared to 2006, driven to a large extent by a larger aircraft remediation of the material weakness in internal control over
fleet, higher lease rates and higher utilization. accounting for certain derivative transactions under FAS 133.
AIG 2007 Form 10-K 81